Buyers: New Mortgage Rules effective this month
The four sweeping changes Finance Minister Bill Morneau announced in October 2016 are:
- As of October 17th, 2016, a new ‘stress test’ will be applied to new high ratio (80% to 95% Loan to Value) mortgage applicants. Essentially, this will mean that even if you have negotiated an excellent rate with your lender, you will then have to illustrate that you can also qualify at the Bank of Canada’s 5 year posted rate. For example, let’s say that on September 28th, you negotiated a rate with your local credit union of 2.5% interest. Under these rules, you will then have to qualify at the higher 4.64% 5 year posted rate from the Bank of Canada. The new ratios being adhered to will be 39% for Mortgage, Insurance, Taxes, Condo Fees and Heat; and no more than 44% for these same expenses plus any other credit. This affects both the lending institutions and buyers as there will be many buyers affected by these changes. The change will take effect November 30th.
- For low ratio mortgages – the amortization times must be 25 years or less, and the purchase price must be less than $1Million, with applicants having a credit score of 600 or more, and the home must be owner occupied. This rule seems to be aimed at the Toronto and Vancouver markets where a great deal of foreign investors have been taking advantage of the system.
- There are new reporting rules re capital gains: up until now, on a primary residence sale, the owner is entitled to pay no capital gains tax on any financial gain realized. As of this tax year, the capital gains tax is still waived, however, the sale of your primary residence and some details must be reported to the Canada Revenue Agency. ( This rule appears to be aimed at foreign buyers trying to claim the primary residence exemption for taxes.)
- The last rule is to do with lending institutions having to take on more risk. Up until now, mortgage insurers such as CMHC and Genworth, have been taking all of the risk when a mortgagor defaults. Under the new rules, in order to strengthen prudent lending practices and to limit the financial obligations in event of a large number of mortgage defaults, the Federal Government is introducing first a study and then new rules. Down the road, this could lead to higher mortgage rates for buyers.
Read about it here. An even better summary with clear examples of how these changes will affect mortgagors, read this excellent blog post by Dave Larock.